<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the quarterly period ended MARCH 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
COMMISSION FILE NUMBER 1-10981
SBS TECHNOLOGIES, INC.
New Mexico 85-0359415
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2400 Louisiana Blvd. NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
(505) 875-0600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
------- -------
As of April 30, 1999, the Registrant had 5,828,783 shares of its
common stock outstanding.
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,952,404 22,874,754
Receivables, net (note 2) 20,399,922 13,118,717
Inventories (note 3) 16,349,083 10,661,211
Deferred income taxes 1,972,862 1,600,000
Prepaid expenses 791,926 288,350
Other current assets 160,598 335,694
------------ ------------
Total current assets 42,626,795 48,878,726
------------ ------------
Property and equipment, at cost 10,013,718 6,776,965
Less accumulated depreciation 3,027,880 2,316,689
------------ ------------
Net property and equipment 6,985,838 4,460,276
------------ ------------
Intangible assets, net 37,378,992 16,694,154
Deferred income taxes 4,223,763 4,230,000
Other assets 106,466 52,031
------------ ------------
Total assets $ 91,321,854 74,315,187
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,500,000 3,000,000
Notes payable to related parties 1,420,661 --
Accounts payable 2,458,452 2,062,373
Accrued representative commissions 431,252 236,228
Accrued salaries 2,615,666 1,996,431
Accrued compensated absences 1,098,595 743,944
Income taxes 486,025 901,909
Other current liabilities 2,096,095 1,110,315
------------ ------------
Total current liabilities 17,106,746 10,051,200
------------ ------------
Total liabilities 17,106,746 10,051,200
------------ ------------
Stockholders' equity:
Common stock, no par value; 99,990,000 shares authorized,
5,828,783 issued and outstanding at March 31, 1999
5,678,200 issued and outstanding at June 30, 1998 49,996,075 47,778,033
Common stock warrants 38,425 70,118
Accumulated other comprehensive loss (989,891) --
Retained earnings 25,170,499 16,415,836
------------ ------------
Total stockholders' equity 74,215,108 64,263,987
------------ ------------
Total liabilities and stockholders' equity $ 91,321,854 74,315,187
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 2
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31 Three Months Ended March 31
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 78,325,058 53,634,931 26,830,138 18,893,283
Cost of sales 32,629,023 23,311,661 11,452,451 8,049,751
------------ ------------ ------------ ------------
Gross Profit 45,696,035 30,323,270 15,377,687 10,843,532
Selling, general and administrative expense 17,785,933 11,935,699 5,972,504 4,262,961
Research and development expense 10,642,029 5,607,995 3,786,455 1,935,026
Acquired in-process research and
development charge 527,514 -- -- --
Amortization of intangible assets 2,849,247 1,418,721 1,147,009 522,243
------------ ------------ ------------ ------------
Operating income 13,891,312 11,360,855 4,471,719 4,123,302
------------ ------------ ------------ ------------
Interest income 257,989 831,690 64,544 263,876
Interest expense (166,626) (141,387) (126,997) (46,320)
Foreign exchange gains 611,560 -- 554,294 --
------------ ------------ ------------ ------------
702,923 690,303 491,841 217,556
------------ ------------ ------------ ------------
Income before income taxes and minority interest 14,594,235 12,051,158 4,963,560 4,340,858
Income taxes 5,395,189 4,880,600 1,735,323 1,757,100
------------ ------------ ------------ ------------
Income before minority interest 9,199,046 7,170,558 3,228,237 2,583,758
Minority interest 444,383 -- -- --
============ ============ ============ ============
Net income $ 8,754,663 7,170,558 3,228,237 2,583,758
============ ============ ============ ============
Net income per common share $ 1.50 1.29 0.55 0.46
============ ============ ============ ============
Net income per common share -
assuming dilution $ 1.42 1.17 0.52 0.42
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 3
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Total
Common stock Common Other stock-
----------------------- stock Retained Comprehensive Comprehensive holders'
Shares Amount warrants earnings Income Loss equity
--------- ----------- -------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 5,678,200 $47,778,033 $ 70,118 $16,415,836 $ - $ - $64,263,987
Exercise of stock options
and warrants 136,583 1,143,592 (31,693) - - - 1,111,899
Stock issued for business acquisition 24,000 713,878 - - - - 713,878
Stock repurchased and retired (10,000) (181,928) - - - - (181,928)
Income tax benefit from stock
options exercised - 542,500 - - - - 542,500
Comprehensive income
Net income - - - 8,754,663 8,754,663 - 8,754,663
Other comprehensive loss:
Foreign currency translation
adjustment - - - - (989,891) (989,891) (989,891)
--------- ----------- -------- ----------- ---------- ---------- -----------
Comprehensive income
Balance at March 31, 1999 5,828,783 $49,996,075 $ 38,425 $25,170,499 $7,764,772 $ (989,891) $74,215,108
========= =========== ======== =========== ========== ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 4
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31
-----------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 8,754,663 7,170,558
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,209,672 672,315
Amortization of intangible assets 2,849,247 1,418,721
Bad debt expense 186,173 225,430
Deferred income taxes (486,427) 240,000
(Gain) loss on disposition of assets 32,142 (232,365)
Gain on foreign currency transaction (611,560) --
Imputed interest -- 137,812
Acquired in-process research and development charge 527,514 --
Minority interest 444,383 --
Changes in assets and liabilities, net of effects of acquisitions:
Receivables (1,800,679) (624,112)
Inventories (2,356,594) (1,972,956)
Prepaids and other assets (281,017) (96,458)
Accounts payable (369,546) 911,388
Accrued representative commissions 195,024 (140,854)
Accrued salaries (1,333,345) (212,196)
Accrued compensated absences 135,782 115,926
Income taxes (2,177,879) (1,269,577)
Other current liabilities 90,911 (263,408)
------------ ------------
Net adjustments (3,746,199) (1,090,334)
------------ ------------
Net cash provided by operating activities 5,008,464 6,080,224
------------ ------------
Cash flows from investing activities:
Cash received from sale of assets 201 54,200
Business acquisitions, net of cash acquired (note 5) (25,142,486) (5,565,603)
Acquisition of property and equipment (3,218,535) (2,511,448)
------------ ------------
Net cash used by investing activities (28,360,820) (8,022,851)
------------ ------------
Cash flows from financing activities:
Payments on notes payable to related parties (1,607,467) (1,000,000)
Payments on notes payable (3,000,000) (13,316)
Proceeds from notes payable to bank 6,500,000 --
Proceeds from exercise of stock options and warrants 1,111,899 1,609,034
Repurchase of common stock (181,928) --
Income tax benefit of stock options exercised 542,500 1,637,977
------------ ------------
Net cash provided by financing activities 3,365,004 2,233,695
------------ ------------
</TABLE>
(Continued)
Page 5
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended March 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Effect of exchange rate changes on cash 65,002 --
Net change in cash and cash equivalents (19,987,352) 291,068
Cash and cash equivalents at beginning of period 22,874,754 21,661,671
------------ ------------
Cash and cash equivalents at end of period $ 2,952,404 21,952,739
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 78,978 3,564
Income taxes paid 7,428,969 4,272,200
Noncash financing and investing activities:
Stock issued for acquisition 713,878 --
Summary of assets acquired and liabilities assumed
through acquisition:
Cash and cash equivalents $ 531,475 239,021
Receivables 5,314,703 943,917
Inventories 3,378,652 475,311
Deferred income taxes (105,638) --
Prepaid expenses and other current assets 102,512 21,111
Goodwill 23,909,563 4,532,254
Covenant not to compete 200,000 --
Property and equipment 556,258 25,817
Note payable - related party (2,865,603) --
Accounts payable (851,903) (176,737)
Accrued representative commissions -- (40,240)
Accrued salaries (1,753,948) (73,938)
Accrued compensated absences (82,225) (9,971)
Income taxes (1,888,522) (54,037)
Other current liabilities (771,363) (77,884)
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
Page 6
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies as set forth in SBS Technologies, Inc.'s (the
"Company") Annual Report on Form 10-K dated September 25, 1998 have been
adhered to in preparing the accompanying interim consolidated financial
statements. These statements are unaudited but include all adjustments,
consisting of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position, results of
operations, and cash flows for such interim periods. Results for such
interim periods are not necessarily indicative of results for a full
year.
2) RECEIVABLES, NET
Receivables, net consisted of the following:
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
Accounts receivable $ 20,985,985 13,408,656
Less: allowance for doubtful accounts (586,063) (289,939)
------------ -----------
$ 20,399,922 13,118,717
============ ===========
3) INVENTORIES
Inventories are valued at standard cost, which approximates weighted
average cost, does not exceed market and consists of the following:
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
Raw materials $ 7,277,440 4,970,267
Work in process 4,712,188 3,709,312
Finished goods 4,359,455 1,981,632
----------- -----------
$16,349,083 10,661,211
=========== ===========
4) EARNINGS PER SHARE
Net income per common share is based on weighted average shares
outstanding. Net income per common share - assuming dilution includes
the dilutive effects of potential common shares outstanding during
the period.
A reconciliation of the numerator and denominator of the per share and
per share - assuming dilution calculation follows:
Page 7
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended March 31
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE
Net Income $8,754,663 5,824,087 $ 1.50 $7,170,558 5,557,505 $ 1.29
-------- --------
EFFECT OF DILUTIVE SECURITIES
Dilutive options and warrants 344,663 585,901
------------------------- -------------------------
NET INCOME PER COMMON SHARE
- - ASSUMING DILUTION
Net Income $8,754,663 6,168,750 $ 1.42 $7,170,558 6,143,406 $ 1.17
-------- --------
<CAPTION>
Three Months Ended March 31
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE
Net Income $3,228,237 5,828,783 $ 0.55 $2,583,758 5,624,928 $ 0.46
-------- --------
EFFECT OF DILUTIVE SECURITIES
Dilutive options and warrants 334,882 555,061
------------------------- -------------------------
NET INCOME PER COMMON SHARE
- - ASSUMING DILUTION
Net Income $3,228,237 6,163,665 $ 0.52 $2,583,758 6,179,989 $ 0.42
-------- --------
</TABLE>
For the nine and three months ended March 31, 1999 and 1998, options to
purchase 922,771 and 1,061,465 and 429,400 and 352,934 shares of common
stock, respectively, were outstanding but were not included in the
computation of net income per common share - assuming dilution because
the options' exercise price was greater than the average market price of
the common shares.
5) BUSINESS ACQUISITIONS
On August 12, 1998, the Company completed the purchase of V-I Computer
("V-I"). Based in Encinitas, California, V-I designs, manufactures, and
markets CPU boards based on the Motorola PowerPC processor for computer
applications that utilize VME and CompactPCI bus standards. The Company
acquired all of the outstanding capital stock of V-I for a total purchase
price of $5.3 million. Of the $5.3 million, $5.0 million was paid in cash
to the sellers at closing, and $0.2 million was paid in cash to the
sellers on October 13, 1998, upon finalizing the closing balance sheet.
The remainder represents acquisition costs associated with the purchase.
The acquisition was accounted for using the purchase method of accounting
and goodwill is being amortized over 10 years. The financial results of
V-I have been included in the Company's Consolidated Financial Statements
from August 12, 1998.
On July 1, 1998, the Company acquired through its newly formed
subsidiary, SBS Technologies Holding GmbH, a 50.1% interest in OR
Industrial Computers GmbH ("OR"). Based in Augsburg, Germany, OR designs,
manufactures, and markets CPU boards utilized in a wide range of embedded
computer applications. As part of the acquisition, the Company acquired,
through its newly formed subsidiary, SBS Technologies Holding GmbH, a
50.2% interest in ORTEC Electronic Assembly GmbH ("ORTEC"), a Mindelheim,
Germany-based related company which manufactures OR's commercial products
and electronic products for other customers. The Company also acquired,
through its wholly-owned subsidiary, SBS Embedded Computers, Inc., based
in Raleigh, North Carolina, a 100% interest in OR Computers, Inc., based
in Fairfax, Virginia, which is the U.S. marketing support organization
for the OR product line. The purchase price, excluding transaction costs,
for the majority interest in the two companies based in Germany and 100%
of OR Computers Inc. was DM 17.5 million, approximately $9.7 million,
paid in cash and 24,000 shares of common stock valued at $713,878 at
Page 8
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Continued)
closing. In addition, the Company and the shareholders of both OR and
ORTEC entered into exclusive option agreements whereby the Company could
acquire the remaining shares of both companies on February 28, 1999. In
December 1998, the Company modified the option agreements, accelerating
the purchase of the remaining interest in OR and ORTEC from February 28,
1999 to December 9, 1998. The purchase price, excluding transaction
costs, for the remaining interest in the two companies based in Germany
was DM 18.2 million. The Company disbursed the cash, approximately $10.4
million, including interest at 4%, during the quarter ended March 31,
1999. Acquisition costs associated with both purchases were approximately
$1.1 million. The acquisitions were accounted for using the purchase
method of accounting and goodwill is being amortized over 10 years. In
connection with the initial acquisition, the Company recorded a $0.5
million earnings charge, based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology
of OR. The assessment determined that $0.5 million of OR's purchase price
represented technology that did not meet the accounting definitions of
"completed technology," and thus should be charged to earnings under
generally accepted accounting principles. This assessment analyzed
certain VME, CompactPCI, and PC Compact products that were under
development at the time of acquisition. These programs were in various
stages of completion ranging from initial development to 90% of
completion, with estimated completion dates ranging from September 1998
through April 1999. The fair value of these development programs was
determined in accordance with views expressed by the staff of the
Securities and Exchange Commission. In conjunction with the acquisition
of the remaining interest of OR completed on December 9, 1998, all
projects in process at the date of the initial acquisition had been
substantially completed such that no additional in-process research and
development was acquired. The financial results of OR, ORTEC, and OR
Computers, Inc. have been included in the Company's Consolidated
Financial Statements from July 1, 1998.
On November 24, 1997, the Company completed the purchase of Micro
Alliance, Inc. ("Micro Alliance"), a privately held San Diego, California
county-based manufacturer of industrial computer enclosures and systems.
Micro Alliance specializes in the design and manufacture of
special-purpose PC-compatible computer systems offering a variety of CPU
boards and system enclosures, including rack mount, desktop and mobile
systems. Most systems contain passive backplanes that allow the addition
of up to 20 ISA and PCI cards. These systems are often customized to meet
the needs of particular OEM applications. The Company acquired all of the
outstanding capital stock of Micro Alliance for a total purchase price of
$5.8 million. Of this total purchase price, $250,000 in cash was placed
in a joint escrow account until the earlier of resolution of certain tax
issues or the end of any applicable statute of limitations. The
acquisition was accounted for using the purchase method of accounting and
goodwill is being amortized over 10 years. The financial results of Micro
Alliance have been included in the Company's Consolidated Financial
Statements from November 24, 1997.
The following pro forma consolidated results of operations have been
prepared as if the acquisitions of Micro Alliance, OR, ORTEC, OR
Computers Inc. and V-I had occurred at July 1, 1997:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31 March 31
----------------- ------------------
($ in millions except per share amounts)
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Sales 78.9 69.5 22.5
Net income 9.1 7.7 2.4
Net income per common share 1.56 1.38 .43
Net income per common share -
assuming dilution 1.47 1.25 .39
</TABLE>
The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisitions been consummated
as of that time, nor is it intended to be a projection of future results.
Page 9
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED HEREIN
MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND
OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE:
GENERAL BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE OF AND DEMAND FOR
THE COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST, AND
INTRODUCE NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY
THE COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
RECENT ACQUISITIONS
On August 12, 1998, the Company completed the purchase of V-I. Based in
Encinitas, California, V-I designs, manufactures, and markets CPU boards based
on the Motorola PowerPC processor for computer applications that utilize VME and
CompactPCI bus standards. The Company acquired all of the outstanding capital
stock of V-I for a total purchase price of $5.3 million. Of the $5.3 million,
$5.0 million was paid in cash to the sellers at closing, and $0.2 million was
paid in cash to the sellers on October 13, 1998, upon finalizing the closing
balance sheet. The remainder represents acquisition costs associated with the
purchase. The acquisition was accounted for using the purchase method of
accounting, and goodwill is being amortized over 10 years. The financial results
of V-I have been included in the Company's Consolidated Financial Statements
from August 12, 1998.
On July 1, 1998, the Company acquired through its newly formed subsidiary,
SBS Technologies Holding GmbH, a 50.1% interest in OR. Based in Augsburg,
Germany, OR designs, manufactures, and markets CPU boards utilized in a wide
range of embedded computer applications. As part of the acquisition, the
Company acquired, through its newly formed subsidiary, SBS Technologies
Holding GmbH, a 50.2% interest in ORTEC, a Mindelheim, Germany-based related
company which manufactures OR's commercial products and electronic products
for other customers. The Company also acquired, through its wholly-owned
subsidiary, SBS Embedded Computers, Inc., based in Raleigh, North Carolina, a
100% interest in OR Computers, Inc., based in Fairfax, Virginia, which is the
U.S. marketing support organization for the OR product line. Effective April
12, 1999, OR Computers Inc. was merged into SBS Embedded Computers Inc. The
purchase price, excluding transaction costs, for the majority interest in the
two companies based in Germany and 100% of OR Computers Inc. was DM 17.5
million, approximately $9.7 million, paid in cash and 24,000 shares of common
stock valued at $713,878 at closing. In addition, the Company and the
shareholders of both OR and ORTEC entered into exclusive option agreements
whereby the Company could acquire the remaining shares of both companies on
February 28, 1999. In December 1998, the Company modified the option
agreements, accelerating the purchase of the remaining interest in OR and
ORTEC from February 28, 1999 to December 9, 1998. The purchase price,
excluding transaction costs, for the remaining interest in the two companies
based in Germany was DM 18.2 million. The Company disbursed the cash,
approximately $10.4 million, including interest at 4.0%, during the quarter
ended March 31, 1999. Acquisition costs associated with the purchases were
approximately $1.1 million. The acquisitions were accounted for using the
purchase method of accounting and goodwill is being amortized over 10 years.
In connection with the initial acquisition, the Company recorded a $0.5
million earnings charge, based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
OR. The assessment determined that $0.5 million of OR's purchase price
represented technology that did not meet the accounting definitions of
"completed technology," and thus should be charged to earnings under
generally accepted accounting principles. This assessment analyzed certain
VME, CompactPCI, and PC Compact products that were under development at the
time of acquisition. These programs were in various stages of completion
ranging from initial development to 90% of completion, with estimated
completion dates ranging from September 1998 through April 1999. The fair
value of these development programs was determined in accordance with views
expressed by the staff of the Securities and Exchange Commission. In
conjunction with the acquisition of the remaining interest of OR completed on
December 9, 1998, all projects in process at the date of the initial
acquisition had been substantially completed such that no additional
in-process research and development was acquired. The financial results of
OR, ORTEC, and OR Computers, Inc. have been included in the Company's
Consolidated Financial Statements from July 1, 1998.
Page 10
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
On November 24, 1997, the Company completed the purchase of Micro Alliance, a
privately held San Diego, California county-based manufacturer of industrial
computer enclosures and systems. Micro Alliance specializes in the design and
manufacture of special-purpose PC-compatible computer systems offering a
variety of CPU boards and system enclosures, including rack mount, desktop
and mobile systems. Most systems contain passive backplanes that allow the
addition of up to 20 ISA and PCI cards. These systems are often customized to
meet the needs of particular OEM applications. The Company acquired all of
the outstanding capital stock of Micro Alliance for a total purchase price of
$5.8 million. Of this total purchase price, $5.7 million was paid in cash,
including $250,000 which was placed in a joint escrow account until the
earlier of resolution of certain tax issues or the end of any applicable
statute of limitations, and the remainder represents acquisition costs
associated with the purchase. The acquisition was accounted for using the
purchase method of accounting and goodwill is being amortized over a ten-year
period. The financial results of Micro Alliance have been included in the
Company's Consolidated Financial Statements from November 24, 1997.
The following pro forma consolidated results of operations have been prepared as
if the acquisitions of Micro Alliance, OR, ORTEC, OR Computers Inc. and V-I had
occurred at July 1, 1997:
($ in millions except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31 March 31
-------- --------
1999 1998 1998
------- ------- -------
<S> <C> <C> <C>
Sales 78.9 69.5 22.5
Net income 9.1 7.7 2.4
Net income per common share 1.56 1.38 .43
Net income per common share -
assuming dilution 1.47 1.25 .39
</TABLE>
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated as of that time, nor is it
intended to be a projection of future results.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
SALES. For the nine-month period ended March 31, 1999, sales increased 46.0%, or
$24.7 million, from $53.6 million for the nine-month period ended March 31,
1998, to $78.3 million. Of this 46.0% increase, sales contributed by V-I, which
was acquired on August 12, 1998, comprised 12.2%, sales contributed by OR,
ORTEC, and OR Computers Inc., which were acquired on July 1, 1998, comprised
20.6%, sales contributed by Micro Alliance, which was acquired on November 24,
1997, comprised 6.9%, and 6.3% was attributable to the Company's other product
lines. During the nine-month period ended March 31, 1999, prices for the
Company's products remained firm, and unit shipments increased across all
product lines, with the exception of the Company's CPU and Modular I/O product
lines, which declined compared to the nine-month period ended March 31, 1998.
The sales of the Company's CPU and Modular I/O products decreased 7.5% compared
to the nine-month period ended March 31, 1998, primarily due to the effects of a
slowdown in the semiconductor industry, the Asian currency and economic crisis,
and a decline in capital equipment expenditures in the U.S. Management currently
believes that the markets for these products are stabilizing, and as such,
currently believes that any further decline will have a minimal effect on its
operations.
Page 11
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
GROSS PROFIT. For the nine-month period ended March 31, 1999, gross profit
increased 50.7%, or $15.4 million, from $30.3 million for the nine-month period
ended March 31, 1998, to $45.7 million. Of this 50.7%, 35.5% was due to the
acquisitions of V-I, OR, ORTEC, OR Computers Inc. and Micro Alliance, and 15.2%
was primarily due to increased sales volume over fixed costs and material costs
improvements in the Company's other product areas, as well as a higher
percentage of sales of the Company's Telemetry, Avionics Interface, and
Connectivity products, which generally yield higher margins than the Company's
other products. For the same reasons, for the nine-month period ended March 31,
1999, gross profit as a percentage of sales increased to 58.3% from 56.5% for
the nine-month period ended March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the nine-month period ended
March 31, 1999, selling, general and administrative (SG&A) expense increased
49.0%, or $5.9 million, from $11.9 million for the nine-month period ended March
31, 1998, to $17.8 million. Of this 49.0% increase, 25.9% resulted from the
added expenditures due to the acquisitions of V-I, OR, ORTEC, OR Computers Inc.
and Micro Alliance, and 23.1% was due to additional salaried sales personnel as
the Company transitioned from an independent sales force to a direct sales
force, as well as additional administrative staffing and promotional costs
commensurate with the growth of the Company. For the same reasons, for the
nine-month period ended March 31, 1999, SG&A expense as a percentage of sales
increased to 22.7% from 22.3% in the nine-month period ended March 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSE. For the nine-month period ended March 31,
1999, research and development expense (R&D) increased 89.8%, or $5.0 million,
from $5.6 million for the nine-month period ended March 31, 1998, to $10.6
million. Of this 89.8% increase, 42.8% resulted from the added expenditures due
to the acquisitions of V-I, OR and Micro Alliance, and 47.0% was due to
increased investment in product development in the Company's other product
areas. For the same reasons, for the nine-month period ended March 31, 1999, R&D
expense as a percentage of sales increased to 13.6% from 10.5% in the nine-month
period ended March 31, 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. For the nine-month
period ended March 31, 1999, in connection with the acquisition of the
majority interest in OR completed on July 1, 1998, the Company recorded a
$0.5 million earnings charge based on an assessment by the Company, in
conjunction with an independent valuation firm, of purchased technology of
OR. The assessment determined that $0.5 million of OR's purchase price
represented technology that did not meet the accounting definitions of
completed technology, and thus should be charged to earnings under generally
accepted accounting principles (see "Recent Acquisitions" above). In
conjunction with the acquisition of the remaining interest in OR, all
projects in process at the date of the initial acquisition had been
substantially completed such that no additional in-process research and
development plan was acquired.
AMORTIZATION OF INTANGIBLE ASSETS. For the nine-month period ended March 31,
1999, amortization of intangible assets increased 100.8%, or $1.4 million, from
$1.4 million for the nine-month period ended March 31, 1998, to $2.8 million.
This increase was the result of the amortization of goodwill associated with the
acquisitions of V-I, OR, ORTEC, and Micro Alliance.
INTEREST INCOME. For the nine-month period ended March 31, 1999, interest
income decreased 69.0%, or $574,000, from $832,000 for the nine-month period
ended March 31, 1998, to $258,000. This decrease was primarily due to the
reduction in interest earned on cash, as the Company's cash decreased due to
the $3.0 million final payment to the former owners of Bit 3 on July 1, 1998,
the $20.1 million payments (net of cash acquired) for the acquisitions of OR,
ORTEC, and OR Computers Inc., the $5.1 million payment (net of cash acquired)
for the acquisition of V-I, and $1.3 million in capital expenditures for
leasehold improvements for the Company's new facility located in Carlsbad,
California.
INTEREST EXPENSE. For the nine-month period ended March 31, 1999, interest
expense increased 17.9%, or $26,000, from $141,000 for the nine-month period
ended March 31, 1998, to $167,000. This increase was due to interest
associated with the $6.5 million of borrowings drawn under the Company's line
of credit during the third quarter of fiscal 1999, as well as interest paid
on the $10.4 million payment for the remaining interest in OR and ORTEC,
partially offset by the elimination of the imputed interest expense
associated with the notes payable to the former owners of Bit 3.
Page 12
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
FOREIGN EXCHANGE GAINS. For the nine-month period ended March 31, 1999, the
$612,000 foreign exchange gain was primarily attributable to the change in
exchange rates between December 9, 1998 and February 28, 1999, relating to
the DM 16.7 million payment made on February 28, 1999 for the remaining
interests in OR and ORTEC (see "Recent Acquisitions" above).
INCOME TAXES. For the nine-month period ended March 31, 1999 and the nine-month
period ended March 31, 1998, income taxes represented an effective income tax
rate of 37.0% and 40.5%, respectively. The decrease in the effective income tax
rate was due to U.S. tax planning strategies implemented by the Company,
including a research and experimental tax credit and increased use of the
Company's foreign sales corporation.
EARNINGS PER SHARE. For the nine-month period ended March 31, 1999, net income
per common share was $1.50 compared to $1.29 for the nine-month period ended
March 31, 1998. Included in net income per common share for the nine-month
period ended March 31, 1999 is $0.07 related to foreign exchange gains and
$(0.05) related to the acquired in-process research and development charge. For
the nine-month period ended March 31, 1999, net income per common share assuming
dilution was $1.42 compared to $1.17 for the nine-month period ended March 31,
1998. Included in net income per common share assuming dilution for the
nine-month period ended March 31, 1999 is $0.06 related to foreign exchange
gains and $(0.04) related to the acquired in-process research and development
charge.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
SALES. For the three-month period ended March 31, 1999, sales increased 42.0%,
or $7.9 million, from $18.9 million for the three-month period ended March 31,
1998, to $26.8 million. Of this 42.0% increase, sales contributed by V-I, which
was acquired on August 12, 1998, comprised 16.2%, sales contributed by OR,
ORTEC, and OR Computers Inc., which were acquired on July 1, 1998, comprised
20.7%, and 5.1% was attributable to the Company's other product lines. During
the three-month period ended March 31, 1999, prices for the Company's products
remained firm, and unit shipments increased across all product lines, with the
exception of the Company's CPU and Modular I/O product lines, which declined
compared to the three-month period ended March 31, 1998. The sales of the
Company's CPU and Modular I/O products decreased 18.3% compared to the
three-month period ended March 31, 1998, primarily due to the effects of a
slowdown in the semiconductor industry, the Asian currency and economic crisis,
and a decline in capital equipment expenditures in the U.S. Management currently
believes that the markets for these products are stabilizing, and as such,
currently believes that any further decline will have a minimal effect on its
operations.
GROSS PROFIT. For the three-month period ended March 31, 1999, gross profit
increased 41.8%, or $4.6 million, from $10.8 million for the three-month period
ended March 31, 1998, to $15.4 million. Of this 41.8%, 34.5% was due to the
acquisitions of V-I, OR, ORTEC, and OR Computers Inc., and 7.3% was due to
increased sales volume in the Company's other product areas. For the three-month
period ended March 31, 1999, gross profit as a percentage of sales was 57.3%,
consistent with the 57.4% gross profit percentage for the three-month period
ended March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. For the three-month period ended
March 31, 1999, selling, general and administrative (SG&A) expense increased
40.1%, or $1.7 million, from $4.3 million for the three-month period ended
March 31, 1998, to $6.0 million. Of this 40.1% increase, 20.3% resulted from
the added expenditures due to the acquisitions of V-I, OR, ORTEC, and OR
Computers Inc., and 19.8% was due to additional sales and administrative
costs commensurate with the growth of the Company. For the three-month period
ended March 31, 1999, SG&A expense as a percentage of sales was consistent at
22.3% compared to 22.6% in the three-month period ended March 31, 1998,
consistent with the increase in sales volume.
Page 13
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
RESEARCH AND DEVELOPMENT EXPENSE. For the three-month period ended March 31,
1999, research and development expense (R&D) increased 95.7%, or $1.9 million,
from $1.9 million for the three-month period ended March 31, 1998, to $3.8
million. Of this 95.7% increase, 45.3% resulted from the added expenditures due
to the acquisitions of V-I and OR and 50.4% was due to increased investment in
product development in the Company's other product areas. For the same reasons,
for the three-month period ended March 31, 1999, R&D expense as a percentage of
sales increased to 14.1% from 10.2% in the three-month period ended March 31,
1998.
AMORTIZATION OF INTANGIBLE ASSETS. For the three-month period ended March 31,
1999, amortization of intangible assets increased 119.6%, or $578,000, from
$522,000 for the three-month period ended March 31, 1998, to $1.1 million. This
increase was the result of the amortization of goodwill associated with the
acquisitions of V-I, OR, and, ORTEC.
INTEREST INCOME. For the three-month period ended March 31, 1999, interest
income decreased 75.5%, or $199,000, from $264,000 for the three-month period
ended March 31, 1998, to $65,000. This decrease was primarily due to the
reduction in interest earned on cash, as the Company's cash decreased due to
the $3.0 million final payment to the former owners of Bit 3 on July 1, 1998,
the $20.1 million payments (net of cash acquired) for the acquisitions of OR,
ORTEC, and OR Computers Inc., the $5.1 million payment (net of cash acquired)
for the acquisition of V-I, and the $1.3 million in capital expenditures for
leasehold improvements for the Company's new facility located in Carlsbad,
California.
INTEREST EXPENSE. For the three-month period ended March 31, 1999, interest
expense increased 174.2%, or $81,000, from $46,000 for the three-month period
ended March 31, 1998, to $127,000. This increase was due to interest
associated with the $6.5 million of borrowings drawn under the Company's line
of credit during this quarter, as well as interest paid on the $10.4 million
payment for the remaining interest in OR and ORTEC, partially offset by the
elimination of the imputed interest expense associated with the notes payable
to the former owners of Bit 3.
FOREIGN EXCHANGE GAINS. For the three-month period ended March 31, 1999, the
$554,000 foreign exchange gain was primarily attributable to the change in
exchange rates between January 1, 1999 and February 28, 1999, relating to the DM
16.7 million payment made on February 28, 1999 for the remaining interest in OR
and ORTEC (see "Recent Acquisitions" above).
INCOME TAXES. For the three-month period ended March 31, 1999 and the
three-month period ended March 31, 1998, income taxes represented an effective
income tax rate of 35.0% and 40.5%, respectively. The decrease in the effective
income tax rate was due to U.S. tax planning strategies implemented by the
Company, including a research and experimental tax credit and increased use of
the Company's foreign sales corporation.
EARNINGS PER SHARE. For the three-month period ended March 31, 1999, net income
per common share was $0.55 compared to $0.46 for the three-month period ended
March 31, 1998. Included in net income per common share for the three-month
period ended March 31, 1999 is $0.06 related to foreign exchange gains. For the
three-month period ended March 31, 1999, net income per common share-assuming
dilution was $0.52 compared to $0.42 for the three-month period ended March 31,
1998. Included in net income per common share assuming dilution for the
three-month period ended March 31, 1999 is $0.06 related to foreign exchange
gains.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses a combination of the sale of equity securities, internally
generated funds, and bank borrowings to finance its acquisitions, working
capital requirements, capital expenditures, and operations.
Cash totaled $2.9 million at March 31, 1999, a decrease of $20.0 million from
June 30, 1998. This decrease was a result of the acquisitions of V-I, OR, ORTEC,
and OR Computers, Inc. for $25.1 million, net of cash acquired, and $1.9 million
for the acquisition of property and equipment, $1.3 million in leasehold
improvements associated with the Company's new Carlsbad,
Page 14
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
California facility, $3.0 million for the final payment to the former owners
of Bit 3, $1.6 million paid to the former minority shareholders of OR and
ORTEC for prior year undistributed dividends and $0.2 million for the
repurchase of 10,000 shares of the Company's Common Stock in accordance with
the Company's Repurchase Plan announced on October 16, 1998 whereby the
Company's Board of Directors approved the repurchase of up to 500,000 shares
of its Common Stock within a twelve month period. These expenditurers were
offset by cash flow from operations of $4.9 million, $1.1 million received
from the exercise of stock options and warrants, and $6.5 million drawn
against the Company's $15.0 million Credit Agreement with NationsBank, N.A.
The Company's growth during the nine-month period ended March 31, 1999 caused
the Company to increase accounts receivable and inventories, which is the
primary reason for the decline in cash flow from operations period to period.
Liabilities were in line with the current level of business. The exercise of
stock options related to Company stock option plans reduced the Company's tax
liability.
On December 1, 1998, the Company entered into a $15.0 million Credit
Agreement ("Agreement") with NationsBank, N.A. ("Lender"). The Agreement
expires on November 30, 1999. For the quarter ended March 31, 1999 there was
$6.5 million of borrowings drawn on the Agreement. The Agreement imposes two
performance ratios on the Company. They are a Senior Funded Debt to EBITDA
Ratio and a Fixed Charge Coverage Ratio. The Senior Funded Debt to EBITDA
Ratio requires that the Company's total debt evidenced by promissory notes,
loan agreements, bonds or similar instruments, but excluding subordinated
debt, will not be greater than a ratio of 1.25 to 1 when compared to the
Company's profit before tax plus interest, depreciation, and amortization
expense for the preceding four quarters from the time of measurement. The
Fixed Charge Coverage Ratio requires that the ratio of (a) the Company's
profit before tax plus interest, depreciation, amortization expense, and
operating lease expense, minus federal income tax and capital expenditures
(all for the immediately preceding four fiscal quarters from the time of
measurement), to (b) the sum of interest expense plus operating lease expense
plus principal payments on debt, (other than debt incurred from this
Agreement and the $3.0 million payment made on July 1, 1998 to the former
owners of Bit 3), plus distributions (including dividends), all for the
immediately preceding four fiscal quarters from the time of measurement, not
be less than 5.00 to 1.00. In addition, the Company is subject to a Tangible
Net Worth covenant whereby the Company shall not permit its total
shareholder's equity less the net book value of intangible assets less
unamortized debt discount and expenses, to be less than the sum of $36.0
million plus 75% of the cumulative consolidated net income for each calendar
quarter commencing on October 1, 1998, through the quarter of measurement,
plus 75% of the amount of any proceeds received from the issuance of any
additional shares of stock or other equity instruments. However, the required
Tangible Net Worth was reduced by $8.0 million after the date that the
Company exercised its option to purchase the minority share of OR and ORTEC.
The Company also is prohibited from disposing of or acquiring certain assets
and businesses, making certain distributions, and purchasing or redeeming or
incurring any liability to purchase or redeem any capital stock without the
permission of the Lender. The Company can borrow against the Agreement with
an interest rate based on the Lender's prime rate or LIBOR in accordance with
the following LIBOR margin. Using the LIBOR option, if the Company's Senior
Funded Debt to EBITDA Ratio is less than 0.50, the interest rate is LIBOR
plus 1.50%, or if the Company's Senior Funded Debt to EBITDA Ratio is greater
than or equal to 0.50 but less than or equal to 1.25, the interest rate is
LIBOR plus 1.75%. Commencing on January 1, 1999, the Company is assessed an
annual non-refundable fee equal to 0.20% times the average daily unused
portion of the $15.0 million commitment during each calendar quarter. The
Agreement is guaranteed by Guaranty Agreements provided by each of the
Company's subsidiaries except for the Company's German subsidiaries. At March
31, 1999, the Company was in compliance with all of the covenants of the
Agreement. Management believes that its financial resources, including its
internally generated funds, and debt capacity will be sufficient to finance
the Company's current operations and capital expenditures, excluding
acquisitions, for the next twelve months.
For the nine-month period ended March 31, 1999, there was no significant impact
from inflation or changing prices on the Company's sales or income from
operations.
YEAR 2000 ISSUE
DESCRIPTION OF THE ISSUE. The Year 2000 ("Y2K") issue refers to the inability
of certain date-sensitive computer chips, software, and systems to recognize
a two-digit date field as belonging to the 21st century. Mistaking "00" for
1900 or any other incorrect year could
Page 15
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
result in a system failure or miscalculations causing disruptions to
operations, including manufacturing, a temporary inability to process
transactions, send invoices, or engage in other normal business activities.
This is a significant issue for most, if not all companies, with far reaching
implications, some of which cannot be anticipated or predicted with any
degree of certainty. The Y2K issue may create unforeseen risks to the Company
from its internal computer systems as well as from computer systems of third
parties with which it deals. Failures of the Company's and/or third parties'
computer systems could have a material adverse impact on the Company's
ability to conduct its business.
YEAR 2000 TASK FORCE. The Company assembled, in April 1998, an internal task
force, chaired by the CEO and comprised of senior managers throughout the
Company, to review its products, business and engineering applications and
suppliers, and to develop contingency plans for Y2K readiness to be completed
by the end of calendar 1999. These contingency plans are under development
and include such options as multiple sources of components and subcontract
assembly and increasing inventory levels of selected critical components. The
goal of the task force is to minimize the effect that Y2K issues will have on
the Company and its customers. The CEO of the Company updates the Board of
Directors on its Y2K readiness at each scheduled Board Meeting.
INTERNAL BUSINESS AND ENGINEERING SYSTEMS. The task force has reviewed all
internal business and engineering computer systems and has determined that such
systems are either Y2K ready, or has determined the required modification
necessary to ensure Y2K readiness, or if the system needs to be replaced. The
Company has already been assured that its business information system, installed
in 1998 and utilized at most of its locations, is Y2K ready as long as the
Company adheres to the supplier's Y2K readiness guidelines. The Company plans to
simulate one complete month's operating activity, in a Y2K environment, using
its business information software in order to verify its Y2K readiness. Planned
completion of this simulation is September 1999. Completion of all required
modifications or replacement of internal engineering development applications
and systems is planned by the middle of calendar 1999.
SUPPLIERS. The major suppliers to the Company are component parts distributors
and contract manufacturers. Often the Company sources its products and
manufacturing services from multiple, competing vendors. The Company is
conducting reviews of its key suppliers to ensure Y2K readiness of as many
vendors as possible and has initiated communication with all of its key
suppliers to determine to what extent the Company may be vulnerable due to their
failure to be Y2K ready. This communication, including site visits by Company
personnel, will be ongoing throughout calendar 1999. As a contingency, the
Company plans to increase inventory levels of critical components. There can be
no assurance that the systems of other companies on which the Company relies
will be Y2K ready on a timely basis and will not have an adverse effect on the
operations of the Company. In the instances where the Company is unable to
determine that its vendors have taken appropriate steps to minimize disruption
due to non-Y2K readiness, the Company is considering contingency plans,
including moving to currently identified alternate sources, or developing new
alternate sources.
PRODUCTS. The Company has assessed the capability of all its existing and legacy
products to handle the year 2000. In addition, all products under development
have been reviewed to ensure Y2K readiness prior to release. Certain of the
Company's computer processor board level products and integrated computer
systems utilize computer chips that include built in operating systems ("BIOS")
allowing the computer to initialize and load software. For many users, software
is provided by sources other than the Company. As with the typical PC computer,
the assessment of whether a complete system will operate correctly may depend on
the BIOS capability and software. To the extent that older BIOS or software are
not Y2K ready, they may need to be upgraded or replaced. All of the Company's
existing businesses have sent letters to all of their current and former
customers indicating to them which of the Company's products may not be Y2K
ready, depending on their application, and what steps need to be taken to ensure
Y2K readiness, or the need for replacement. In addition, the Company has posted
on its web site (HTTP://WWW.SBS.COM) Y2K readiness information on all of its
products.
Page 16
<PAGE>
SBS TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
(Continued)
COSTS. The Company expects the cost of its Y2K assessment, including both
incremental spending and reallocated resources, will not be material and will
be absorbed within the normal capital equipment and operating expenditures of
the Company. To date, costs incurred and included in the Company's reported
financial results have been limited to cost of existing employees assigned to
the task force, or outside consultants hired on a temporary basis. The
current assessment does not include potential costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business. This assessment is subject to change. Since there
is no uniform definition of "Y2K readiness" and since all customer situations
cannot be anticipated, particularly those involving third party products, the
Company may encounter claims as a result of the Y2K transition. Such claims,
if successful, could have a material adverse impact on future results.
CUSTOMERS. Because the Company has no customer which comprises more than 5% of
its sales, the Company believes that the effect of a failure of any single
customer to continue to purchase goods and services from the Company due to
non-Y2K readiness will not be material to the operations of the Company. The
Company sells its products and services to many hundreds of customers. Some of
the Company's customers may not become Y2K ready, in which case, the Company
cannot assure that their lack of readiness in the aggregate, will not have a
material effect on the Company's operations.
EURO CONVERSION
On January 1, 1999 eleven of the fifteen member countries of the European
Union adopted the euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the euro.
The legacy currencies of the participating European Union members will remain
legal tender in the participating countries for the transition period from
January 1, 1999 to January 1, 2002. Beginning January 1, 2002, the
participating countries will issue new euro-denominated bills and coins for
use in cash transactions and legacy currencies will no longer be legal tender
for any transactions, making conversion to the euro complete. The Company has
begun to assess its need to adapt information technology and other systems to
accommodate euro-denominated transactions, its need to modify fixed assets to
accommodate euro-denominated amounts, any potential impact on terms and
enforceability of legacy denominated contracts, and potential tax
consequences of currency conversion. This assessment is being conducted to
determine whether the euro conversion will have a material adverse effect on
the Company's financial position, results of operations, or liquidity.
Page 17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults by the Company upon its Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation S-K)
03.i (1) Articles of Incorporation, as amended.
03.ii (1) Bylaws, as amended.
10.al (1) Lease Agreement and Amendments between
Mair GmbH & Co, KG and OR Industrial
Computers GmbH, a wholly-owned subsidiary of
SBS Technologies Holding GmbH, a
wholly-owned subsidiary of SBS Technologies
Inc.
27. Financial Data Schedule
(b) Reports on Form 8-K - None
(1) See Exhibit Index on Page 20
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBS TECHNOLOGIES, INC.
Date: May 14, 1999 /s/ Christopher J. Amenson
----------------------------
President and Chief Executive Officer
Date: May 14, 1999 /s/ James E. Dixon, Jr.
----------------------------
Vice President of Finance & Administration
Page 19
<PAGE>
SBS TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION METHOD OF FILING
- -------------- ----------- ----------------
<S> <C> <C>
03.i (1) Articles of Incorporation, as amended. - -
03.ii (2) Bylaws, as amended. - -
10.al Lease Agreement and Amendments between Mair GmbH & Co, KG
and OR Industrial Computers GmbH, a wholly-owned subsidiary
of SBS Holding GmbH, a wholly-owned subsidiary of SBS
Technologies, Inc. Filed herewith electronically
27. Financial Data Schedule Filed herewith electronically
</TABLE>
(1) Incorporated by reference to Exhibit 3.i, of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
(2) Incorporated by reference to Exhibit 3.ii, of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
Page 20
<PAGE>
Exhibit 10.a1
Lease
The following lease is being concluded
between
Mair GmbH & Co. KG
Nederlinger Strabe 11, 80638 Munich
- hereinafter referred to as landlord -
and
Or Industrial Computers GmbH
Sieglindenstr. 19 1/2, 86152 Augsburg
- hereinafter referred to as tenant -
<PAGE>
Lease between Mair GmbH & Co. KG and Or Industrial Computers GmbH
Section 1 Leased property
1. The following areas are being leased in the property
constructed on the premises located at Memminger Stra(beta)e
14 in Augsburg:
<TABLE>
<CAPTION>
Leased areas Surface area Price (DM) Total monthly rent
(square meters) (DM)
---------------------------- -------------------- --------------- ------------------
<S> <C> <C> <C>
3rd floor 446 10.50 4,683.00
4th floor 446 10.50 4,683.00
5th floor 446 10.50 4,683.00
6th floor 446 10.50 4,683.00
Basement rooms K11 and K12 167 5.00 835.00
Parking spaces 30 30.00 900.00
20,467.00
=========
</TABLE>
2. A variance of up to 3% between the leased area specified in
the floor plan and the actual area does not constitute a
claim for modification of rent on the part of either the
landlord or the tenant. If there is a variance of more than
3%, rent will be adjusted in accordance with the full amount
of the variance.
3. The landlord shall only be held liable for structural
defects in the event of gross negligence.
4. The tenant engages in the manufacture and sale of electronic
devices, as well as hardware and software, in the leased
space. He is also entitled to engage in similar business
operations in the leased space. The leased premises may only
be used for other purposes with the prior written approval
of the landlord.
5. The tenant has been issued a sufficient number of keys for
the duration of the rental period. The tenant agrees to
return all keys upon termination of the rental period.
6. The rent will be increased annually by 2.5% on January 1st
of each year. Each increase will be based on the most recent
applicable rent.
Section 2 Term of lease
1. The lease begins on January 1, 1996 or upon occupation of
the premises, but no later than February 1, 1996.
2. The lease is being concluded for a period of ten years.
Unless it is canceled by one of the contracting parties no
later than one year prior to expiration of the
<PAGE>
term of the lease, the lease will be automatically extended
for periods of five years each.
3. In addition, the tenant will be given the option of leasing
the space on the ground floor, as well as space on the 2nd
floor, five years after the beginning of the lease. Should
the space on the ground floor and on the 2nd floor be leased
to outside tenants during this five-year period,
arrangements can be made so that the Or Company is
responsible for this property as the general tenant. The
conditions will be established when the option is exercised.
4. Notice of termination must be delivered by registered
letter, which must be received by the other contracting
party no later than the last business day prior to the first
day of the period of notice. The timeliness of termination
will be determined by the date on which the letter of
termination is received by the contracting party.
5. During the notice period, the tenant must permit the posting
of for-rent signs in windows and other suitable locations.
6. Section 568 BGB does not apply upon expiration of the rental
period. Any lease extension agreements must be made in
writing.
Section 3 Extraordinary termination
1. Both contracting parties are entitled to the extraordinary
termination of the agreement for good cause.
2. The landlord can terminate the lease for good cause
effective immediately if
a.) the tenant is more than two months in arrears,
partially or fully, with payment of rent or other
payment obligations,
b.) the tenant or individuals acting on behalf of the
tenant is responsible for substantial harassment
of the landlord, other tenants, or individuals
acting on behalf of these parties,
c.) the tenant continues to use the premises in
violation of the terms of the lease or continues
the unauthorized relinquishment [of the premises]
to third parties, in spite of having been warned
not to do so by the landlord,
d.) the tenant files application for the institution
of reorganization or bankruptcy proceedings,
extrajudicial proceedings to regulate debt are
instituted, or the tenant defaults,
e.) the tenant's liability base becomes significantly
impaired in comparison to the conditions indicated
at the time of lease signing,
<PAGE>
f.) the tenant fails to meet his remaining contractual
obligations within a reasonable period of time, in
spite of having been warned in writing by the
landlord.
3. In the event of a premature termination of the lease for
which the tenant is responsible, the tenant will be liable
for the loss of rent, collateral fees and other services for
the period of time [in question], as well as all other
losses suffered by the landlord as a result of premature
termination of the lease. Continued payment of the agreed
rent and any applicable collateral fees until the end of the
term of the lease may be required as minimum damages, unless
the landlord has indemnified himself or could have
indemnified himself by otherwise leasing the space.
4. A claim for reimbursement of the security payment or any
rent paid in advance does not exist for the duration of the
agreed term of the lease. The landlord is entitled to retain
these security payments until the intended termination of
the lease, unless a replacement tenant with the same credit
standing has been found or could have been found.
Section 4 Premature termination of the lease
1. The tenant is entitled to demand cancellation of this lease
during the lease period if he assumes other office space on
the property from the landlord in application of the right
to rent property provided in this lease. The tenant is also
entitled to demand cancellation of this lease with three
months' notice during the term of the lease if he provides
the landlord with a subsequent tenant with the same credit
standing who is acceptable to the landlord.
2. If a subsequent tenant is not provided, the lease can be
terminated with three months' notice if the tenant agrees to
pay damages of DM 50,000.00
3. The parties to the lease will arrange the details of
cancelling this lease according to the situation on hand,
with the stipulation that a clean transition must be
guaranteed.
Section 5 Rent
1. The monthly rent amounts to DM 20,467.00 (in words: Twenty
thousand four hundred and sixty seven German marks), plus
the applicable value-added tax.
2. In addition to the rent, the tenant is responsible for
payment of a share of the following incidental expenses
based on the ratio of the space being leased to him to the
total rental space on the property:
<PAGE>
a.) the cost of heating, air-conditioning, lighting,
sprinkler system, etc.;
b.) the cost of common areas and facilities;
c.) the cost of the water supply;
d.) the costs of cleaning the building, including the
common areas and rooms, the external glass and
facade areas, as well as the cost of pest control;
e.) the costs of street cleaning and of maintaining
and repairing all outside facilities, such as
landscaped areas, sidewalks, parking lots, access
roads, etc., as well as the cost of snow and ice
removal;
f.) drainage costs;
g.) waste disposal costs;
h.) chimney sweeping fees;
i.) the costs for building personnel, as well as
equipment and materials required for operation and
cleaning of the building;
j.) the cost of operating a freight elevator;
k.) the cost of operating and maintaining the common
antenna;
l.) the cost of purchasing, maintaining, and operating
temperature measuring equipment, including that
installed due to regulatory requirements after
conclusion of the lease;
m.) the cost of building insurance, except fire
insurance, building liability insurance, and
property taxes.
3. The landlord or a firm commissioned by the landlord shall
prepare the final bill for incidental expenses during the
first half of each year following the year in which these
expenses were incurred. The landlord is entitled to change
the billing method and period for incidental expenses or to
change individual incidental expense items. The landlord is
entitled to require suitable monthly advance payments on the
aforementioned incidental expenses. These payments can be
adjusted and set accordingly to reflect actual use. The
landlord is also entitled to transfer the collection of
payment for individual incidental expenses, such as heating
costs, electricity costs, etc., directly to the applicable
utility company. All municipal fees must be paid directly by
the tenant. Should the City of Augsburg bill the landlord
for these fees, they will be charged to the tenant.
4. In coordination with the landlord, the tenant agrees to pay
the invoicing party directly for all incidental expenses
incurred, if possible.
5. The tenant is responsible for payment of incidental
expenses, regardless of whether and to which degree he uses
the common areas of the general property.
Section 6 Payment of rent and incidental expenses
1. Rent is payable monthly, in advance, by no later than the
third business day of each month into an account to be
specified by the landlord. The timeliness of
<PAGE>
payment shall be determined by the date on which funds are
received, and not by the mailing date.
2. If payments are in arrears, the landlord is entitled to
charge collection fees and late payment fees. This does not
affect the assertion of other claims for damages.
3. In response to any instructions provided by the tenant, the
landlord may, at his own discretion or consideration, use
payments made by the tenant to offset unpaid liabilities
arising from this agreement or other agreements concluded
with the tenant.
4. Rent will be prorated by calendar days for the month of
transfer. Each calendar day, including the date of transfer,
shall correspond to 1/30 of the monthly rent and incidental
expenses.
5. The tenant is not entitled to offset the landlord's claims
arising from this lease with disputed counter-claims or to
use such counter-claims to assert the right of retention.
The tenant can assert claims for reduction if the use of the
leased space was compromised, but not in a purely
insignificant manner.
<PAGE>
Section 7 Security
1. To secure all payment obligations arising from this
agreement, the tenant is obligated to pay the landlord a
security in the amount of DM 50,000.00 upon transfer of the
leased property. The security payment will not be returned
until all obligations of the tenant are paid, especially
those for payment of rent, incidental expenses, and
maintenance costs, and until the leased property has been
vacated and surrendered.
2. 6.3% in annual interest will be paid on the cash security
payment. Interest payments are due on the 31st of December
of each year.
3. The security payment may not be mortgaged or assigned.
Section 8 Heating
1. The heating system is a shared system. In addition to normal
heating costs, the cost of operation, care, and maintenance
of the heating system and of the temperature measuring
service, as well as repair of the system, will be
distributed among all tenants based on the ratios of space
rented by individual tenants to the entire rented space in
the building (see Section 5, section 2).
2. A partial or full shutoff of the heating system due to a
local fuel shortage does not entitle the tenant to assert
claims for reduction or damages. The same applies to all
other types of necessary interruptions in service.
Section 9 Subletting
1. The tenant is entitled to sublet or allow third parties to
use the leased space, provided he complies with the
stipulations for use of the leased space described under
Section 1. Before concluding a sublease or beginning any
other form of surrender of use, the tenant must notify the
landlord of his intention to do so. The landlord can
prohibit subletting or other surrender of use for good
cause.
2. In the event of unauthorized subletting or surrender of use,
the landlord is entitled to have any company signs of
companies that are not contracting parties removed at the
expense of the tenant.
3. In the event of unauthorized subletting, the landlord can
terminate the lease without notice. Furthermore, he can
demand that the tenant terminate the sublease immediately,
but within no more than one month. In the event of a
sublease or surrender of use to third parties approved by
the landlord, the tenant
<PAGE>
will be held liable for all actions or assignments of his
subtenant or of the party to whom he has surrendered the use
of the leased premises.
4. In the event of a sublease, the tenant, as a precautionary
step, will now assign any claims he may have against the
subtenant, as well as any liens, to the landlord in an
amount not to exceed the landlord's claims
5. Any profits achieved by the tenant from the subletting
arrangement are to be surrendered in full to the landlord.
Section 10 Official requirements
1. The tenant is solely responsible for any official permits he
requires in order to do business on the leased premises.
These permits have no effect on the obligation to pay rent
or on the date on which the lease begins.
2. Structural and operational requirements arising from the
commercial operations being conducted by the tenant on the
leased premises must be directly fulfilled by the tenant at
his own expense.
Section 11 Maintenance and structural changes to the leased premises
1. The landlord will have all maintenance work and necessary
repairs to the leased premises be completed at his own
expense.
2. According to the enclosure from Mr. Wormann, architect,
operations-specific installation work will be performed on
levels 3, 4, 5, and 6 at a cost of DM 40,000.00. (Paint
walls, ceilings, and windows white. Freshly paint facade
walls, if installed for operational reasons. Re-cover floors
with ANTI-STATIC material as specified. Install 32 new glass
doors.)
3. For these installations, the tenant will pay a maximum
surcharge of DM 40,000.00 net (not including sales tax),
payable upon occupation of the premises.
4. The tenant is obligated to perform, at his own expense, any
cosmetic repairs that become necessary during the term of
the lease, as well as to maintain shutters, lighting and
air-conditioning systems, locks, WATER FAUCETS, TOILETS,
DRAINS, HEATING EQUIPMENT, SUN SHADES on windows, and
similar features in usable condition, as well as to replace
broken panes of glass.
5. The tenant must notify the landlord or his agent of any
damage to or in the building and in the leased premises as
soon as he becomes aware of such
<PAGE>
damage. The tenant is liable for any additional damage
attributable to tardy notification. In the event of imminent
danger, the tenant must himself take the necessary steps to
protect the landlord against unavoidable loss.
6. The tenant is liable to the landlord for damages
attributable to his negligent violation of his obligation to
exercise due care, especially if supply and drainage lines,
toilet and heating systems, etc., are operated in an
improper manner, the premises are inadequately ventilated,
heated, cleaned, or insufficiently protected against
freezing.
7. The tenant is equally liable for damages attributable to the
negligent actions of vicarious agents, subtenants, visitors,
suppliers, craftsmen, etc.
8. The tenant must immediately eliminate any damages for which
he is answerable. If, after having received a written
warning, the tenant fails to meet this obligation within a
reasonable amount of time, the landlord can have the
necessary work performed at the expense of the tenant. If
there is a risk of imminent damage, written notification and
provision of notice is not required.
9. The tenant may only undertake structural modifications,
especially renovation and the installation of fixtures,
built-ins, etc., with the prior written approval of the
landlord. The landlord is required to provide his approval
if the tenant has a legitimate interest in the modification
and if it does not compromise any legitimate interests on
the part of the landlord. If the landlord issues such
approval, the tenant is responsible for obtaining the
necessary official permits. He is responsible for all costs
associated with such permits, as well as for the cost of
performing the construction work. Building safety may not be
compromised by structural changes under any circumstances.
The approval must also include a decision regarding whether
the built-ins are to remain on the premises or be removed
upon termination of the rental period.
10. The tenant is liable for all damages incurred in connection
with the construction work he undertakes.
Section 12 Improvements or structural changes undertaken by the landlord
1. The landlord may undertake improvements or structural
changes that become necessary to maintain the building or
the leased space, as well as to avert imminent danger or to
remove damage, even without the approval of the tenant. This
also applies to work that is not necessary but beneficial,
such as modernization of the building and the leased
premises. The tenant must provide access to the premises in
question at all times, and may not obstruct or delay
completion of the work.
<PAGE>
2. To the extent that the tenant must tolerate the work,
asserting claims for damages, offsetting claims, and
withholding rent payment are precluded. However, the
landlord must, if possible, make necessary allowances for
the business interests of the tenant, and may not extend the
work for more than four weeks. A share of the rent may be
withheld if this limit is exceeded.
3. The tenant will bear the cost of any structural
modifications or built-ins that become necessary due to
changes in the law or official requirements, provided such
modifications and built-ins are attributable to his business
operation.
Section 13 Landlord's access to the leased premises
1. The landlord or his agent is entitled to enter the leased
premises during business hours. They are also permitted
access at any time in the event of imminent danger.
2. If the landlord wishes to sell the property, he or his agent
may enter the leased premises, together with potential
buyers, during business hours. If the lease has been
terminated, he or his agent may enter the leased premises,
together with potential tenants, during business hours
3. The tenant must ensure that the premises can also be entered
during his absence.
Section 14 Landlord's right of lien
1. In the interest of exercising his right of lien, the
landlord or his agent is entitled to enter the leased
premises, alone or in the presence of a witness, at any
time. The landlord may remove any objects that are subject
to the landlord's lien and place them under lock and key in
a location of his choice.
2. If property that has been brought in is seized by a third
party, the tenant is obligated to notify the landlord
immediately.
3. The landlord's right of lien for claims arising from this
agreement also applies to any items that the tenant has
brought into other properties owned by the landlord in
connection with other leases concluded with the landlord.
Section 15 Transfer of the lease by the landlord
Subject to the consent of the tenant, the landlord is permitted to
allow another person or company to assume from the landlord the rights
and obligations of the
<PAGE>
lease, including all collateral agreements, with the effect of
discharging the landlord's obligation.
Section 16 Termination of the rental period
1. Following termination of the rental period, the tenant must
return the leased premises to the landlord in a
professionally renovated condition. In particular, this
means that the walls, ceilings, and windows must be painted
and appropriate cleaning work performed.
2. Upon vacating the leased premises, the tenant must return
all keys to the landlord, including those he procured
himself, without demanding payment. Otherwise, the landlord
is entitled to open the leased premises at the expense of
the tenant, to have them professionally renovated, and to
have new locks or keys made.
3. The tenant may remove any fixtures he has added to the
leased premises. However, the landlord may demand that the
fixtures be left on the premises upon termination of the
lease if the landlord pays a fee corresponding to their
actual cash value. The tenant must remove any built-ins he
has had installed and restore the leased premises to their
original condition, unless the landlord has agreed that they
may remain on the leased premises at no charge.
4. The landlord and tenant must discuss the removal of the
fixtures and built-ins in a timely manner, so that any
agreements in this regard can be reached before the premises
are vacated. If the landlord does not assume the tenant's
fixtures, the tenant must, at the end of the lease, return
the leased premises to the condition in which they were
transferred to the tenant.
Section 17 Other agreements
1. The tenant is not entitled to assign to third parties any
claims and rights against the landlord to which he is
entitled.
2. The tenant declares that he has been entered into the
commercial register of .......
3. There are no collateral agreements to this lease. To be
legally effective, supplementary agreements must be made in
writing.
4. If desired, the tenant will be granted the right of first
refusal to the leased premises. The parties are in agreement
that the right of first refusal must be exercised in
officially certified form to be effective.
<PAGE>
5. Should a provision of this agreement be of no effect, the
actual intention shall apply.
Munich, dated July 27, 1995 Augsburg, dated August 9, 1995
Mair GmbH & Co. KG Or Industrial Computers GmbH
- - Landlord - - Tenant -
<PAGE>
Section 1 Leased property
1. The following areas are being leased in the property
constructed on the premises located at Memminger Stra(beta)e
14 in Augsburg:
<TABLE>
<CAPTION>
Surface area Price (DM) Total monthly rent
(square meters) (DM)
--------------------------------- --------------- ------------- ------------------
<S> <C> <C> <C>
Ground floor without vestibule 452 10.50 4,746.00
2nd floor 580 10.50 6,090.00
3rd floor 446 10.50 4,683.00
4th floor 446 10.50 4,683.00
Parking spaces 30 30.00 900.00
21,102.00
=========
</TABLE>
Following the renovation, the number of square meters will
reestablished according to new measurements; the rent will
be recalculated on the basis of the new measurements.
2. The landlord shall only be held liable for structural
defects in the event of gross negligence.
3. The tenant engages in the manufacture and sale of electronic
devices, as well as hardware and software, in the leased
space. He is also entitled to engage in similar business
operations in the leased space. The leased premises may only
be used for other purposes with the prior written approval
of the landlord.
4. The tenant has been issued a sufficient number of keys for
the duration of the rental period. The tenant agrees to
return all keys upon termination of the rental period. Steps
must be taken to ensure that the leased premises can be
sealed off against the remainder of the building for
insurance purposes. The necessary measures will be
coordinated with the architect. The tenant shall be
responsible for the resulting costs.
5. The rent will be increased annually by 2.5% on January 1st
of each year. Each increase will be based on the most recent
applicable rent.
Section 2 Term of lease
1. The lease begins on January 1, 1996 or upon occupation of
the premises, but no later than February 1, 1996. It cannot
be terminated during the first five years, until December
31, 2001 or December 31, 2002.
<PAGE>
Augsburg, [illegible date]
<PAGE>
AMENDMENTS TO THE LEASE [FOR THE PROPERTY LOCATED AT]
MEMMINGER STR. 14
between
MAIR GMBH & CO. KG
NEDERLINGER STRA(BETA)E 11, 80638 MuNICH
and
OR INDUSTRIAL COMPUTERS GMBH
SIEGLINDENSTR. 19 1/2, 86152 AUGSBURG
PAR. 1, SECTION 5
Steps must be taken to ensure that the leased premises can be sealed off against
the remainder of the building for insurance purposes. The necessary measures
will be coordinated with the architect.
PAR. 2, SECTION 2
A rent amount conforming to local custom shall be used as the point of reference
for extensions.
PAR. 2, SECTION 3
The agreed conditions shall also apply to the new areas, but only if a lease is
concluded for these areas within the next five years.
PAR. 2, SECTION 4
Termination may be effected by registered letter or by fax.
PAR. 5, SECTION 2K
To be deleted without replacement.
PAR. 5, SECTION 2L
<PAGE>
To be deleted without replacement.
PAR 5, SECTION 5
Incidental costs will be billed in proportion to the property rented.
PAR. 6, SECTION 4
The tenant has the option of storing his effects at no charge for up to one
month prior to occupation of the premises (as permitted by renovation work).
PAR. 9, SECTION 5
If the tenant opts to rent the entire property within five years, he may
temporarily sublet segments of the property at a higher price per square meter.
However, this shall only apply during the first five years of the lease.
PAR. 11, SECTION 2
The tenant will be responsible for the cost of installing new unpainted drywall,
including the corresponding electrical wiring, at a total cost not to exceed DM
40,000.00. The landlord will be responsible for the cost of subsequent work
performed in accordance with the tenant's instructions. Plans will be
coordinated with the architect. Additional changes will be charged to the
tenant. The landlord will bear the cost of demolition and removal of drywall,
painting the walls, ceilings, and windows, installation of conductive floors, as
well as the installation of clear full glass doors (no more than 10 units per
floor).
PAR. 11, SECTION 4
Cosmetic repairs are subject to legal requirements, as well as to the fact that
the property is being transferred in perfect condition, as documented in a
property transfer report.
Munich, August 18, 1995
Mair GmbH & Co. KG Or Industrial Computers GmbH
- - Landlord - - Tenant -
<PAGE>
Second amendment to the lease [for the property located at]
Memminger Str. 14
between Mair GmbH & Co. KG
and
Or Industrial Computers GmbH
According to the enclosed ground floor plan of outside facilities, EFFECTIVE
MARCH 1, 1997, you will receive
2 additional parking spaces, bringing the total number to 32.
According to our letter of January 9, 1997, the new rent effective March 1, 1997
is:
DM 21,629.55 net
+ parking spaces @ DM 30.00 each DM 60.00
+ 2.5% rent increase DM 1.50 DM 61.50
---- ----------
DM 21,691.05
+ 15% VAT' DM 3,253.66
DM 24,944.71 gross
---- ---------- -----
Munich, dated March 6, 1997 Augsburg, dated March 12, 1997
Mair GmbH & Co. KG Or Industrial Computers GmbH
- - Landlord - - Tenant -
<PAGE>
Addendum/amendment to the lease dated July 27 / August 9, 1995
Due to the installation of current meters by the Augsburg Municipal Works, the
interim meters are no longer needed. Current consumption will now be measured at
individual tenant meters provided by the City of Augsburg. A meter will also be
installed for the common areas.
This general meter covers: - stairwell lighting
- elevator
- heating
As with individual tenants' consumption, this meter will also be read and a bill
provided by the City of Augsburg.
To simplify invoicing, the tenant, Or Industral Computers, will assume the costs
for the remaining tenants and will allocate these costs further according to the
following distribution key:
Or 63.04% = 1.924 m2
C&S 36.62% = 965 m2
Hofmeister 5.34% = 163 m2
------------
3,052 m2
The distribution key will be revised if there are any changes in the areas being
leased.
After preparing an estimate, the Augsburg Municipal Works will require a monthly
installment payment, to which all tenants will contribute. The same applies to
water and other utilities, as well as maintenance, but does not apply to heating
oil.
The cost of heating oil will be distributed among all tenants on the basis of
the previous year's total oil bill and the distribution key and will be
converted into a monthly fixed installment, which will be paid, as described
earlier, to the primary tenant listed below.
The monthly flat rate for power used in common areas, maintenance, water, and
sewage is initially set at DM 1,200.00 for all parties (to be distributed
according the distribution key). Depending on consumption, this flat fee may be
reassessed in the following year.
The primary tenant,
<PAGE>
OR INDUSTRIAL COMPUTERS GMBH,
is in agreement with the handling of internal invoicing, while the tenants,
Or Industrial Computers ground floor to 4th floor,
C&S Computer + Software 5th and 6th floors,
Elisabeth Hofmeister basement rooms,
are in agreement with the handling of distribution [of expenses] and assumption
of the cost of shared electricity.
The [cost of] heating oil will be immediately reallocated based on the
distribution key, depending on the invoice.
<PAGE>
This agreement also establishes that the primary tenant, Or, will be responsible
for ordering fuel, as well as for paying power and water bills.
To cover the expense of the resulting invoicing and monitoring activities, a
temporary annual fee of DM 750.00 per tenant will be assessed. This fee will be
established jointly in relation to actual expenses.
This fee for expenses includes:
- monitoring the heating oil supply
- ordering heating oil and handling its delivery
- invoice allocation among the tenants
- inspecting the furnace room and monitoring the heating
system's operation and potential problems - allocation of
the cost of electricity for common areas among the tenants -
elevator monitoring and maintenance administration
The following parties are in agreement with the addendum to the lease:
Or Industrial Computers
C&S Computer + Software
Elisabeth Hofmeister
Munich, November 26, 1997 Augsburg, November 24, 1997
Mair, landlord Or, tenant
Augsburg, November 24, 1997
C&S, tenant
Augsburg
Hofmeister, tenant
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found in
the Company's 10-Q for the year-to-date and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,952,404
<SECURITIES> 0
<RECEIVABLES> 20,985,985
<ALLOWANCES> (586,063)
<INVENTORY> 16,349,083
<CURRENT-ASSETS> 42,626,795
<PP&E> 10,013,718
<DEPRECIATION> 3,027,880
<TOTAL-ASSETS> 91,321,854
<CURRENT-LIABILITIES> 17,106,746
<BONDS> 0
0
0
<COMMON> 49,996,075
<OTHER-SE> 24,219,033
<TOTAL-LIABILITY-AND-EQUITY> 91,321,854
<SALES> 78,325,058
<TOTAL-REVENUES> 78,325,058
<CGS> 32,629,023
<TOTAL-COSTS> 64,433,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 186,173
<INTEREST-EXPENSE> 166,626
<INCOME-PRETAX> 14,594,235
<INCOME-TAX> 5,395,189
<INCOME-CONTINUING> 14,594,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,754,663
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.42
</TABLE>
